1. Announcements
2. The Ways & Means committee hybrid law.
3. You Ask, We Answer (Estate Planning)
4. Parallel Universes (Estate Planning theme)
5. Recommendations: Paul Glass, Narayan Pallavur
6. Prabha’s Office Location + appointments

To stay posted on all tax law updates, follow us on LinkedIn

We’re closing in on another year – another year severely affected by the pandemic to the point where we’re wondering where a few months went. Nonetheless, time moves on and we still have to plan ahead. We’re hoping that you and those close to you are healthy, vaccinated, and that you have been able to venture out a little more.

At the moment, we are encouraging clients to make appointments with us to plan for the next year or years ahead. This could include retirement plans, funds you need to allocate for expenses next year, or early estate planning.

Some specific points to keep in mind are:

1. As the year comes to a close, you might want to think what investments you need for your business - equipment, software or other assets- and make those purchases before the end of the year.

2. If you have a business and have surplus earnings, try to speak to your advisors today to set a plan in motion for a retirement plan.

3. Maximize your 401K if you haven’t already.

4. Use your monies in your FSAs for the qualified expenses.

5. If you wish to make a charitable contribution, you could take advantage of 100% deductions this year and not be subject to limits based on AGI.

6. If you are going to sell and generate capital gains income on a transaction , consider pulling the trigger today vs early 2022 – we do know rates will go up – we just do not know how high (it can at a minimum be 3% points higher to as much as 6 percentage points higher).

7. Consider setting up trusts today and using the $11.7 million exemption before they drop to lower limits. There is no claw back provision in the reckoning as of now.

8. If you have a deferral entity, consider making year end decisions on how much you need in running costs for that entity. You will need to write checks before 31st December of this year.

9. If you have created irremovable trusts in 2021 as several of our clients have, you may have to decide whether to tax the income in the hands of the trust or distribute the income and tax in the hands of the beneficiary as they might be at a lower tax bracket. Contact us with the YTD income so we can help you make this call.

To make an appointment with us, send an email to ea@venturapranas.com and title your emails “year end planning” so we can schedule those for early December. Please also include details of your location and time zone to make scheduling easier.

The House Ways and Means Committee is working on a via media between Trump’s tax laws and Biden’s proposed changes. The word is still out on what the final outcome will be, but so far here is where things are landing. This is an ever dynamic and moving target, but here is a snapshot of changes that affect most of our clients.

Trump tax Laws Vs the Biden Plan – what the trade-off looks like now

You might have read about the potential tax law changes particularly impacting the lifetime exemption tax. The information below, laid out in the format of Q&A, should answer most of your queries. It is worthwhile mentioning, however, that the Build Back Better tax proposal that the House has now approved and sent to the Senate, contains no changes from current law for estate and gift tax purposes. This means that the previously proposed reduction of $11.7 million lifetime gift/estate tax exemption, the treatment of grantor trust assets is being subject to inclusion for US estate tax purposes. It also means that elimination of valuation discounts for investment entities have, for now, been removed from the proposed tax legislation.

Of course, the Senate or its conferees could insist on inclusion of some of these proposals and we do not know what will be the final verdict at the end of this debate. Still, it is worthwhile to discuss what is currently in the tax code for the purpose of this section. The good news is that a lot of options that we previously thought were off the table for estate planning are actually very much possible after all.

I am working with my estate attorney in the US and establishing irrevocable trusts for my children. Should I have them set up as grantor or non-grantor? I live in India right now but am a US citizen with children who are also US citizens.

You should set them up as a non-grantor. The reason for this is non-grantor trusts are taxed in the grantor’s hands for tax purposes to take advantage of the expanded tax slabs in the USA which are unavailable for trusts. You will, therefore, be better off treating them as non-grantor because the income will not have to be taxed in India as a result. It is almost always likely that the Indian tax rates are far higher than the US.

Are there any other state considerations in setting up irrevocable trusts for my children who are also US citizens?

The state of formation should be preferably a no-tax state like Nevada, Delaware or Washington. Texas laws for trusts and estate are less evolved than the others we have mentioned above. Even if you are a Texas resident, seek out advice to see if you might be better off setting up in Delaware. Also, the investment advisor and trustee should be US resident preferably and also a resident of a low or no-tax state preferably. Steer clear of California if you can because CA has some convoluted laws on subjecting trusts to state tax if the fiduciary is a CA resident.

What is a Pot Trust?

A Pot trust has usually a group of beneficiaries without an identifiable portion attributable to any one beneficiary. This is typical of when a family line and all the descendants of that family line are included as beneficiaries. It can consist of as-yet-unborn children and grandchildren.

I am a resident of India for FEMA can I establish an irrevocable trust in the US for my children?

I earned funds when I was living in the US and have since moved to India. I am setting up a trust in the US with these funds. Would these assets be within the reach of FEMA?

The funds are not with the reach of FEMA as they were eared in your NRI days. The residency for FEMA still matters for the formation of the trust and not so much the asset base in question since you might be FEMA resident at the time of the formation of the trust, as a Grantor.

What is a dynasty trust?

A dynasty trust is a long-term trust created to pass wealth from generation to generation without incurring transfer taxes—such as the gift tax, estate tax, or generation-skipping transfer tax (GSTT)—for as long as assets remain in the trust. The dynasty trust's defining characteristic is its duration.

Dynasty trusts usually begin as grantor's trusts so that income is taxed at the grantor's tax rate rather than at the higher trust rate. When the grantor dies, the trust becomes irrevocable, becoming a separate taxable entity that must file its own tax return — Form 1041, U.S. Income Tax Return for Estates and Trusts. You can, however, make provisions to make any trust non grantor for tax reasons mentioned in the questions above.

If my Indian resident citizen mother sets up a trust for me (US citizen) and my wife (US citizen) and kids (US citizens). We are all now resident of India., can we each take out $1MM in distributions if we were to become an NRI in the future?

Since this would be an Indian trust with an Indian grantor with Indian assets and with FEMA residents as beneficiaries, the trust at its formation would not need RBI approval. If any of the beneficiaries were to later become NRIs, permission from the RBI would be required.

If the beneficial interest in the Trust vested when you were all residents of India there should be no reason that after you all become NRI you all should be able to transfer your $1MM in distributions to a NRO account in india and thereafter avail the $1 million repatriation limits as the rules currently stand.

What is the downside of having an irrevocable trust in India created by my Indian parents but with determinable portions attributable to me (US citizen) and my sibling (Indian citizen and resident)?

There is no downside. It is a good idea that it is indeterminate so you as a US person are not subject to Throwback rules. Throwback basically means that income accretions to a trust are not subject to taxation in the hands of the US person as they are earned. This can be costly to US persons. So careful attention needs to be exercised when crafting foreign (to the US) trusts.

Does an irrevocable trust have to file its own taxes once formed?

Yes, the irrevocable trust needs to file form 1041 after the completion of the tax year when the income is more than $600.

If income is distributed in an irrevocable trust, who pays the tax?

If the income is distributed, the beneficiary will pay tax based on the income reported and distributed on form K1.

Therefore, it might be a call you need to make before the end of the year or upto 65 days after the year end. If the beneficiary is at a lower tax bracket it may be better to distribute and tax in the hands of the beneficiary. If the beneficiary is in a taxable state and the trust is not, then you may want to consider the state tax cost in the equation as well.

Can these irrevocable trusts help with QSBS multiplier?

Absolutely yes. They have to be crafted carefully. An irremovable trust is usually a completed gift trust and transferees of a gift are each eligible to avail the QSBS exemption.

Tell me about a scenario with a US Citizen creating a complex trust having two beneficiaries (one a US Citizen, and the other an Indian Citizen). If there is distribution of income, how would it get reported and taxed, and what questions will arise on Corpus?

Consider this scenario:

There is a US Citizen (aged 60 years) whose spouse is an Indian (aged 55 years) having 2 sons; one being a US Citizen / resident (aged 25 years) and another one being an Indian Citizen / Resident (aged 23 years). The US citizen has assets more than $25 million and he is planning to move the assets in a more tax efficient way (in terms of estate tax & Income tax in India and USA). A considerable part of his asset is of shares in a company. The questions to consider are as follows:

When there is distribution of Income, it would be reported and taxed based on Form K1 by both beneficiaries. The Indian beneficiary would have to pay the taxes in the US and receive off-sets through treaty between US and India.

For the Granter of the trust (in this case the parent who is the US citizen) No Income tax impact in the US or India.

Beneficiary 1 (the child who is a US Citizen / Resident):For US tax, he will pay the taxes on the income generated in USA as and when the income is generated / accrued (reported on K1forms) and distributed. Corpus distributions are not taxable. For his India tax returns there will be no impact as he is an NRI on both income and corpus.

Beneficiary 2 (the child who is an Indian Citizen / Resident): In the US he will pay the taxes on the income generated in USA on form 1040NR, as and when the income is generated / accrued (reported on K1forms) and distributed. Distribution of corpus is not taxable in the US.

In India, being a resident Indian, global income reporting would be applicable and the income from complex trust (K1) would also be taxable on his personal ITR. Relief also would be available on the taxes paid in USA (1040NR). Distribution of corpus is not taxable and this only means original transfers to the trust and income that was previously taxed and retained in trust up to the date of conversion to complex trust.

Is the Corpus on the date of the conversion of the Grantors trust to a Complex trust? Can the income for the past year keep getting accumulated as Corpus until the date of conversation of the Grantor trust to the complex trust?

From an Indian standpoint – the Corpus is everything you put into the trust at its time of funding. It does not include previously taxed and accumulated earnings. To be specific, the corpus will only consist of the original capital transfers to the trust. The income that was earned, accumulated and taxed in the hands of the trust will always remain income. To the extent such income is distributed later to a US Citizen and he is in India, he runs the risk of being taxed on it again as the immunity from tax in india under section 56(2)(vii) will only be available to original corpus and not the earnings in the trust on such corpus.

Stories and scenarios you can relate to, for families in the US and in India, to help you understand the complexity (and humour) involved in financial planning. Please note that the following is simply a case study. Any references to names and situations are entirely coincidental.

In this issue of parallel universes, through the scenarios of Harold and Prakash, we’d like to illustrate how citizenship and residency (yours and your children) can impact your estate taxes.

Consider the case of Harold, a US citizen. Harold has some Indian blood in him, but both his parents and he were born and raised in the US. For all legal and tax purposes, he is a US person. Curious about his ancestry, he started traveling frequently to India in his early twenties, and has since then spent a lot of time in India and built several relationships.

Around 10 years ago, Harold co-founded a pharmaceutical company in India. The market for pharmaceuticals has exploded, and as a result, the company’s valuation has grown exponentially. The last time the company did a round of funding, they received approximately $10 million. In 3 to 4 years when they are ready for their next round of funding, he expects to raise $30 million. Harold and his family are all US citizens. The pharmaceutical company is a Private Limited company, set up in India.

The key issue here, is that the value of the company is going to be well north of the lifetime exemption in the US which today is $23.4 million. This means that if his estate becomes $40 million in the future, the balance $16.6million ($40m – $23.4m) is exposed to estate duty in the US which is as high as 40%. If he does some planning, he could switch some of these assets to his children so that the growth happens in his children’s hands, rather than his hands. This will allow him to preserve enough assets to be shielded from estate tax. For the rest of the growth, if he transfers it smartly (and earlier) when today’s valuation of the company is lower than what he expects it to be in a few years, then whenever that exit happens, he has already transferred it before he can be exposed to the lifetime estate duty of 40%.

What should Harold consider here? Today’s value needs to be estimated. Harold needs to carve out whatever he doesn’t need direct access to, and proportion that to his children. The smart thing would be to set up an irrevocable trust in India and make a lifetime gift today (at today’s value of $3 - 4million) to his children. By doing this, if it becomes 4 times that ($16million), then he would have transferred $12 million (16 minus 4) free of tax to his children.

The aspect to remain cautious of is that he would be creating an Indian trust for them (since he is dealing with an Indian asset), and FEMA rules can make transfers out of the country difficult later.

It’s also important to note that India keeps threatening to bring in estate taxes. Even if the law comes into effect, you are still protecting yourself against a future Indian estate tax law.

Contrast Harold’s case of being a US citizen with assets in India to the case of Prakash, an Indian citizen living in India with a growing asset in the US.

Prakash studied in the US at various points over two decades ago and he has several close friends, both Indian and American, in the US. He has close friends from India with children in the US and has kept in touch with the entrepreneurship environment in the US since his business school days in California in the early 2000s.

A couple of years ago, during a vacation to the US, Prakash and his friends talked about a startup idea that interested him. The idea was an app, in the healthcare space, and Prakash wanted to invest because he believed in the idea and trusted his friend who was going to be the founder. Prakash’s investment into his friend’s company is, essentially, an asset of Prakash’s that is now in the US.

Now let’s say that this startup does well and is valued at a billion US dollars in a few years. Suddenly, Prakash, an Indian citizen, has a huge asset in the US which will be subject to estate taxes. The issues here are complex because a US citizen (between a married, filing, joint couple) can have an estate as high as $23.4 million and no estate taxes. When the situation changes and you have a non-resident alien, the exemption amount plummets to just $60,000. In short, if something were to happen to Prakash, and his shares in this startup are $1 million, then everything above $60k is exposed to a $40% estate tax.

The way for Prakash to protect his assets, as a non-resident alien vis-à-vis the US, is that he doesn’t hold the shares in his hands. Instead, he can hold them in a name of a company. Here’s the thing: non-individual structures cannot be taxed. Estate duties by their very nature apply to individuals. What Prakash could have done at the time of investment is to have started a company in India, and then make the investment on the behalf of the company so that the company, not Prakash, owns the interest in the US startup. Even considering FEMA obligations, this is a better way to make an investment in a foreign entity. In doing so, ODI rules need to be kept in Mind.

Something to remember is that you can’t be resident in India and send the money to a country like Singapore (tempting for many because Singapore has great capital gains laws) if you’re looking to invest in a US entity because FEMA is against using an investment vehicle in another country that has a downstream entity.

Prakash has one child in the US and one in India. In his case, and in the case of any Indian who wishes to invest in a US entity, if they can foresee the need to keep some portion of the assets in the US for the sake of the children, then it’s better to set up a US trust and have the trust invest in the company. By doing this, the trust beneficiaries, who might eventually settle in the US, will be protected from US estate taxes.

For Retirement Planning

We have found that many of our clients don’t think about their retirement plan early enough, and there is much planning one can do in their forties and fifties that will ease their retirement. Typically, professionals are too busy with their immediate career and families, which is why thinking about, let alone planning for, their retirement is rarely given priority. If it all seems too overwhelming to tackle, we strongly recommend talking to wealth management advisors who can walk you through the process and make some recommendations that are tailor-made to your financial situation. In short, we urge you to get started on the path to securing your financial well-being for your retirement years.

One of the planners we frequently recommend to clients is Narayan Pallavur, a Wealth Management Advisor at Merrill Lynch. Pallavur holds an MBA and has also earned the Certified Financial Planner®(CFP®), and the Certified Investment Management Analyst® (CIMA®) designations.

Pallavur offers a broad, holistic approach to wealth management while working closely with other experts such as your CPA and estate planning attorney to ensure that your investment strategy is aligned with your personal and financial goals.

He emphasizes the importance of working closely with your financial advisor to develop a goal based financial plan that puts you and your family, rather than the market, at the center of the wealth management process. This approach helps bring to light your concerns and priorities and translate them into personally meaningful financial goals with strategies to pursue them.

Pallavur specializes in working with small business owners, sole proprietorships and physician practices to set up Defined Benefit pension plans that allow for the highest level of tax-deductible retirement contributions. He also assists clients with potential solutions for income management, education funding, retirement income planning, exit planning for small business owners, guidance for executives with concentrated stock positions, traditional and alternative investments, legacy planning, and wealth transfer.

As Ventura Pranas already has a close relationship with Pallavur, coordinating with us will be seamless. To make an appointment with Narayan Pallavur, send him an email at narayan.pallavur@ml.com.

For Insurance

Life insurance takes on many functions in practice, other than its conventional benefit (providing for loved ones). At a personal level, it is usually oriented around creating or protecting an estate. During early years in one’s professional career, people take insurance to protect and provide for loved ones; later, often serves as protective collateral necessary to acquire large assets of individuals, and even later, it serves to ensure personal legacy that may be diminished by estate taxes.

If well (and appropriately) structured, life insurance can also do the following:

1. Protect assets from litigation

2. Aid in avoiding income and minimizing estate taxation

3. Provide substantial tax-advantaged savings

4. Allow flexibility in charitable donations

5. Protect from exposure to market risk

6. Avoid probate contests or delay in estate distribution at death

7. Provide a solution for equal distribution when not all heirs are in the family business and/or real estate.

We recommend working with Paul Glass, a lawyer and Chartered Life Underwriter (CLU) with extensive experience in life insurance and representing many major life insurance companies. Glass says that existing policies should be reviewed for a number of reasons. Term policies may be nearing their end date and/or may not contain all of the additional benefits new term policies may provide, poorly performing policies should be re-evaluated (particularly some Universal Life policies that were sold years ago), and one must be aware of beneficiaries that aren’t coordinated with the overall estate plan (some coverage may not be suited for their needs).

Glass spent many years as an estate planning attorney before his decades in life insurance, representing most major life insurance companies. In addition to his law degree, Paul is a Chartered Life Underwriter (CLU), Chartered Advisor in Philanthropy (CAP) and Certified in Long Term Care (CLTC). Paul can be reached at 818-207-4897 or send him an email at paul@glassinsur.com.

Prabha is currently in the US, at the Ventura Pranas office in Los Angeles. Now is a great time to meet with her for your year-end planning or retirement planning, so send an email and get an appointment with her soon.

Los Angeles dates: Now, until December 14, 2021.

But if she is in India too, getting on calls should be just as easy. Just state your time zone and we will make something work.

Get in touch with her scheduling team at ea@venturapranas.com and tell us in brief what you would like to discuss. Alternatively, email Prabha directly at psrinivasan@venturapranas.com.

The Los Angeles office will be moving:

We are happy to announce that we will soon be moving our Los Angeles offices out of 2316 Hill Street Santa Monica, CA 90401. Those of you who have visited us, may well know that this is a home that doubles up as an office. With the pandemic at its seeming “end” we would like to give our clients the experience of meeting us in a more formal space. Our new office location should get finalized in the next week or so. We will notify you as soon as it is. Stand by for a separate communication regarding the location of the new offices.